When it comes to buying life insurance, shoppers are often confused about what type to buy: term or whole?
We've come down on the side of term life insurance repeatedly and for lots of good reasons. But maybe you'd prefer to know what some of the nation's biggest personal finance experts think about whole life insurance instead? It turns out, they have quite a lot to say.
Here's what Dave Ramsey, Suze Orman, and Clark Howard think about whole life insurance.
On buying a whole life insurance policy as an investment
One of the most common arguments for whole life is that it's not just a life insurance policy, it's also an investment. It might be an investment, but we think it's a pretty crummy one, and the experts agree.
In Clark Howard's Living Large for the Long Haul (2013), Howard lists some major drawbacks to "investing" in life insurance (p. 223):
The embedded costs in [whole] life insurance policies can be massive because they're padded with commissions for the salesperson. Plus, if you can't pay the premiums on a [whole] life insurance policy, the policy lapses and you're wiped out."
In his book The Total Money Makeover: A Proven Plan for Financial Fitness (2013), Dave Ramsey calls whole life "one of the worst financial products available" and looks at what happens to a hypothetical 30-year-old man with $100 to spend on life insurance (p. 55):
[If he] purchases twenty-year level term insurance with coverage of $125,000, the cost will be only $7 per month. [...] If he goes with the Cash Value option, the other $93 per month should be in savings, right? Well, not really... All of the $93 per month disappears in commissions and expenses for the first three years; after that, the return will average 2.6 percent per year for Whole Life.
As for Suze Orman, in her book The Money Class: How to Stand in Your Truth and Create the Future You Deserve (2012), the top four items on her quick list of investments to avoid (p. 276) are:
A whole life insurance policy
A variable life insurance policy
A variable annuity
A universal life insurance policy
In summary, and to quote another line from Ramsey's book: When it comes to investing, "[t]his product is a really bad idea!"
On financial advisors who push whole life policies
These personal finance experts save their harshest words for the salespeople who push whole life policies. Suze Orman, who is literally left speechless (for a half second) when a caller tells her he has whole life insurance policies for everyone in the family, including his kids, has this to say about financial advisors who push whole life on young families (jump to 4:39 for the good part):
On buying whole life policies for your kids
Clark Howard says to beware of pitches that say life insurance is the best way to pay for college (p. 223):
The idea is to buy a policy on your kid and then they will have life insurance down the road in the event of their premature death. When they make it to college age, there's this wonderful tax loophole that allows you to borrow from the policy's cash value to pay for college.
But as we quoted above, Howard goes on to point out that the hidden costs of whole life plus the risk that you might lose it one day makes it a terrible college savings product.
In this video response to a caller, Howard states, "It is a much more effective way for you to pay for your kid's college [by] putting money in a state-sponsored 529 plan, than it ever would be to buy life insurance for college."
Suze Orman is also against it for that reason and she, too, suggests a 529 plan. But she also introduces a more personal reason to avoid it: you'd never want the death benefit from your child's life insurance policy anyway. It’s true, your child doesn’t need to die in order to get the cash value from her whole life policy eventually, but that’s sort of beside the point Orman is making.
What to do if you already have a whole life policy
Howard argues that if you're trying to fix a leaky budget, your whole life policy may be the culprit. Ramsey advises callers who currently have whole life to "buy term and then drop the whole life." And if that doesn't get the point across, here's Suze Orman's advice to do the same thing: buy term life and then cancel, cancel, cancel.
In Clark Howard's Living Large in Lean Times (2011), Howard offers another tip for leveraging a whole life policy to get a term life policy instead (p. 161):
If you are in a whole life policy… with a substandard company, you can borrow the cash value and use those proceeds to buy a term policy from a strong company.
On shopping for term but being sold whole
Even the experts make mistakes. Ramsey says that when he first bought life insurance years ago he got "ripped off" by whole life, so it's no wonder he comes down so hard on it. Orman explains how salespeople will push whole life in her book Women & Money: Owning the Power to Control Your Destiny (2010) (p. 244):
A life insurance agent will try to sell you on the idea that you need to buy a super-expensive policy that will cover you throughout your entire life. The reality is that very few of you ever need a "forever" [permanent] life insurance policy. …They are unnecessary and way too expensive.
To avoid that kind of aggressive pushiness, Howard advises that you shop for your life insurance online.
Coincidentally, we have the internet's most accurate quoting engine and comparison shopping tool for term life insurance right here. And since our agents are paid salaries instead of commissions, you can shop knowing we will never push whole life on you.